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The Non-Correlation Between Board Independence and
Long-Term Firm Performance

The boards of directors of American public companies are dominated by independent directors. Many commentators and institutional investors believe that a "monitoring board," composed almost entirely of independent directors, is an important component of good corporate governance. The empirical evidence reported in this Article challenges that conventional wisdom.

We conduct the first large-sample, long-horizon study of whether the degree of board independence (proxied by the fraction of independent directors minus the fraction of inside directors on a company's board) correlates with various measures of the long-term performance of large American firms. We find evidence that low-profitability firms increase the independence of their boards of directors. But there is no evidence that this strategy works. Firms with more independent boards do not perform better than other firms. Our results support efforts by firms to experiment with board structures that depart from the conventional monitoring board.

Note: This paper previously appeared in SSRN journals under the title "Do Independent Directors Matter?"

Date posted: January 3, 2003

Suggested Citation

Bhagat, Sanjai and Black, Bernard S., The Non-Correlation Between Board Independence and
Long-Term Firm Performance. As published in Journal of Corporation Law, Vol. 27, pp. 231-273, 2002. Available at SSRN: http://ssrn.com/abstract=313026